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How Astute Marketers Use The 80/20 Rule For Customer Segmentation

Do you ever wonder why large corporate marketers, the companies who send you junk mail and catalogues, are so successful?

It’s because they’ve mastered the balance of recency, frequency and money among their customers.

I call this combination RFM in my book “80/20 Sales and Marketing”. The idea is about which customers you pay attention to in your business, based on who’s paying attention to you.

RFM is…

  •  Recency: How recently has your customer purchased? Have they bought something in the last 90 days?
  •  Frequency: How often has your customer purchased? Do they purchase repeatedly?
  •  Money: How much has your customer spent, and which customers spend the most?

The junk mailing companies have RFM down to a science. They know they can always acquire new customers because they know exactly who to send their lousy letters to — and when. In fact, RFM is standard practice in direct marketing using mailing lists, but many marketers are unaware of it.

Each of your individual customers will have a specific RFM: a combination of when they spend, how much and how often. This means you can focus limited resources on a relatively small fraction of your customers and get huge returns.

One percent of what you own and do will produce 99 percent of the results. You’ll have 80/20 leverage over your customer base.

How To Apply RFM

To use each customer’s RFM in a valuable way, throw the information into a spreadsheet. Rank customers from most to least recent, from most to least frequent and from most to least money spent. Score them on a scale from 1-10 in each category, and say, “I only want customers with an R+F+M score of more than 20.”

This mindset will save you piles of money if you’re planning to send direct mail or use other costly marketing techniques. You can also differentiate your top few dozen customers and give them the royal marketing treatment. These are the customers with RFMs that represent huge returns on investments, so don’t just send them a letter. Think bigger: a special package, a Christmas gift or even a wine and cheese party!

Even if you’re an email marketer, the RFM theory still applies to you. The biggest mistake email marketers can make is assuming it doesn’t.

Your customers’ level of  interest in your email list mirrors the 80/20 Power Curve. The bottom 10 percent don’t want to hear from you ever again, and the top 1 percent want to hear from you once a day. So if you mass-email a sales offer to a list of 10,000 past customers, the lion’s share of your sales will come from the top 500 people on the list. You’re just irritating the bottom 9,000, and you’ve taught them to ignore your emails.

Not only do smaller email lists reach a more nuanced customer base, but they’re also more likely to get delivered. Large ISPs like Yahoo Hotmail and AOL let single messages through unhindered. Anything larger than an email blast of 100 to 200 names is much more likely to end up in spam filters.

orange-segmentsBuild Email Sublists

Instead, you should be building email sublists. Segment your customers in six to 12 categories according to the products, services and information they’re interested in.

There are several ways to segment an email list. Ben Hunt and I both use InfusionSoft, which allows you to “tag” people who bought a certain product, opened a certain email or clicked on a certain link. Then create content to match the wants and needs identified on the sublists, and suddenly your email lists will be far more responsive.

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